econscius

Posts Tagged ‘New York’

Which State Has The Most Inequality? Texas or New York? Why?

In Gini Ratio, Income Tax Rates, Inequality, Texas on October 21, 2011 at 12:25 am

Econscius looked into economic inequality by state and found some surprising facts.  Which state did you think has the most economic inequality, defined by the government’s Gini ratio?  Did you guess Texas or Alabama?  The Gini ratio measures unequal outcomes in wealth; a ratio of 0.0 would mean everyone had exactly the same and a ratio of 1.0 would mean one person held all the wealth.

The District of Columbia has the highest level of inequality (Gini ratio of 0.532).  New York has the highest state ratio at 0.502, followed by Connecticut, Texas, Louisiana, Alabama, Mississippi, Illinois, Georgia and Massachusetts which rounds up the Top 10 with a score of 0.468.

The state with the lowest Gini ratio is Alaska at 0.402.  Utah is second most equal at 0.414, followed by Wyoming at 0.415.

Econscius ran several regression analyses of the most recent state Gini ratios, looking for correlations that would help identify the cause(s).  First, I compared “Right to Work” states against the tally of state Gini ratios, expecting the comparative absence of unions might be a factor.  “Right To Work” states prohibit closed shops (mandatory unions).  But there is no statistical correlation (RSquared = 0.01), which can be easily seen by the high rate of dispersion in the graph below.  An interesting follow-up may be to see if there is any difference using the unionized proportion of the workforce in place of Right To Work state.

State Gini Ratio vs Right to Work (1 = yes, 0 = no)

The scatterplot below shows a rather loose relationship between average income and Gini ratio.  The trend line shows high income states tend to be slightly more equal than lower-income states.  (R-squared is 0.08).  In statistical terms, income and Gini ratio should be impacted by co-variance (the two variables are not independent of each other), making it a less than ideal measure.

State Gini Ratio Vs. Median State Income

Next, I ran a regression of Gini ratio against Net State Income Tax Rate, as calculated by the National Bureau of Economic Research.  The NBER is best known as the group that officially dates recessions.  As seen in the graph below, the trend line is the opposite of what one might expect.  Higher state income tax rates actually imply slightly higher inequality (R-squared 0.08). 

The scatterplot graph below clearly shows how the highest inequality states of New York and Connecticut have high taxes and several of the states with no income tax have the lowest Gini ratios, e.g. Wyoming and Alaska.  While higher income taxes are not well correlated with equality, an observation is states known for high property taxes (which are regressive) are bundled amongst the most unequal, including New York, Connecticut, New Jersey, Florida and Illinois.

State Gini Ratio vs. Net State Income Tax Rate (NBER 2009 Tax Data)

Lastly, let’s look at state Gini ratio vs. population density (people per square mile) .  This regressed variable has the strongest correlation with Gini ratio (R-squared 0.14). 

Why would sparsely populated states be more equal and densely populated states have a greater gap between the rich and poor.  I hypothesize higher density means more urbanized areas, which means more specialization of skills.  The economic concept of division of labor shows how the greatest economic benefits come from having each person focus on what they are most economically productive at and then trading their output with the output of someone else for all other items.  One way to think of it is to imagine Steve Jobs working in isolation in a rural area.  He would have less time to spend inventing computers and whatnot if he was unable to employ other people to mow his lawn, clean his car and other household chores.  Imagine if he had to do his own legal work, build his own house, cook his own food because there were no restaurants, etc. 

Large cities allow a high degree of division of labor.   Urban areas tend to be centers of economic specialization.  There are centers of specific industry specialization such as entertainment in Los Angeles, energy in Houston, finance and media in New York, insurance in Hartford, government in Washington DC, pharmaceuticals in New Jersey, autos in Detroit and technology in San Jose.  Most cities provide network benefits for commerce.  Corporate headquarters are mostly found in large metropolitan areas as employers can easily find necessary skilled workers in management, marketing, human resources, accounting, law, consulting and finance. 

The concentration of highly paid professionals in these large cities also leads to a concentration of poorly paid service workers because of the high degree of division of labor.  Whereas a small town worker may handle many household chores on their own, the highly compensated professionals around big cities like Los Angeles and New York hire maids, nannies, gardeners and even dog walkers.  They outsource some of their work to dry cleaners and restaurant employees.  They also may do more retail shopping, which means more need for low skill, low wage workers at retailers plus truck drivers and distribution center workers to deliver the goods.  It is no surprise, then, that large cities like Chicago, New York, Detroit and Los Angeles are both very rich and very poor at the same time. 

The wealthy professionals living in Atherton, CA, Huntington Beach, CA, Wilmette, IL, Grosse Point, MI and Irvington, NY trade some of their copious amounts of money for leisure time by sub-contracting low skill work like house painting and pizza delivery to low skill workers.  These low skilled workers are generally paid below average wages, which helps explain why the large cities, and the states they reside in, are both rich and poor.  This helps explain the high Gini ratios in the more densely populated states.

These four regression analyses do not explain all of the differences in Gini ratios.  While income tax rates have no relationship, it is possible a measure of to marginal tax rates on the rich may be a factor.  We did not look at state and local sales and property taxes.  Other possible explanations may include educational attainment dispersion within each state, the types of industries prevalent in a state, immigration levels, and even cultural differences between states. 

We found New York is actually less equal than Texas, which probably surprises most people but likely reflects the high density of population in metro New York City where many highly compensated, high skilled workers reside as well as many low pay, low skill workers who serve their day-to-day needs.  As we have seen in my posts on Texas, (https://econscius.wordpress.com/2011/09/03/stellar-texas-job-growth-in-above-average-wage-cities/) it is increasingly densely populated and affluent in its large metro areas of Dallas, Austin, San Antonio and especially, Houston.   Metro Houston is the 3rd largest home of Fortune 500 HQs and is now the major home of the energy industry’s professional staffs (senior management finance, legal, accounting, engineering).  Progressive, union-friendly states like Connecticut and Massachusetts are less equal than Right To Work states like Nebraska and Kansas.  It appears one factor is the densely populated concentrations of skilled workers such as hedge fund and insurance workers in Connecticut and biotech and technology in suburban Boston. 

I believe Gini ratio and measures of inequality are overhyped.  If a richer neighbor of mine accidentally drops some of his property, say his iPod, in a river, inequality has been slightly reduced but am I better off?  Nevertheless, the evidence on state Gini coefficients suggests there is no diabolical plot causing high inequality.  Several of the least equal states like New York, Massachusetts and Connecticut are reliably Democratic, high tax and union friendly.  The District of Columbia is the most unequal of all.  The inequality must come from other sources, certainly including the concentration of highly paid, skilled workers in those states. 

 

Notes:

Chart 1: 2009 Gini coefficient data (latest available) from http://en.wikipedia.org/wiki/List_of_U.S._states_by_Gini_coefficient retrieved 10/18/11.   Right-To-Work states from http://en.wikipedia.org/wiki/Right-to-work_law retrieved 10/18/11.

Chart 2: 2006-7 average data (latest available) from http://en.wikipedia.org/wiki/List_of_U.S._states_by_median_income retrieved 10/18/11.

Chart 3: 2009 data (latest available) from http://www.nber.org/~taxsim/state-marginal/avrate.html, retrieved 10/19/11.

Chart 4: Population Density from http://en.wikipedia.org/wiki/List_of_U.S._states_by_population_density retrieved 10/18/11.

Pictures from Wikipedia Commons.

Your comments are welcomed!  What do you think causes inequality?

Chicago & New York “Fall Behind” Shanghai & Beijing Without Amtrak?

In Amtrak, China, Federal Deficit, High Speed Rail, Obama Administration on July 30, 2011 at 2:51 am

Imagine increasing the population of the United States by fourfold.   Then squeeze these 1.3 billion imagined Americans into a smaller area:  the area east of the Missouri River south to the Gulf of Mexico.

Keep metro New York City in the same place with the same size metropolitan area but double the population of Staten Island. 

Keep Chicago where it is but increase its metro population by 2.5 times (from 9.5 million to 23.1 million).  Then squeeze this mega Chicago into a much smaller area about three times more densely populated than New York City.  No longer is Chicagoland sprawling but instead a tightly packed, vertical city. [1]

Next, remove most of the cars.  In fact, whereas the United States you know has nearly one car for every man, woman and child, our imagined United States would have only about one car per twenty people. [2] [3]  Take away America’s automotive culture, leaving a society where few drive but most aspire to someday drive.  Essentially, it is a lot like the United States automotive culture circa 1920.  Lastly, remove most of America’s passenger air travel. 

What we have imagined is a lot like China.  The New York -2.5X Chicago pairing is very close in actual distance and imagined densities and populations to the Beijing-Shanghai endpoints on the new Chinese high-speed railroad. 

We also need to imagine a feeder network of other high-speed trains in our imagined 1.3 billion person United States.  Imagine we obtain this extra population by plunking down an extra 200 metro San Antonios anywhere we can find space east of the Mississippi, keep our imagined Chicago of 23.1 million and supersize all other major American cities.  The Chinese municipality of Chongqing has 28.8 million people – about five times the population of metro Miami – so let’s substitute Chongqing for Miami and build a train there, too. [4]

Some believe higher speed Amtrak passenger trains are essential for the United States.  President Obama has repeatedly pushed for high-speed Amtrak, saying we will “fall behind” China if we do not.  Obama warned, “In the race for the future, America is in danger of falling behind. That’s just the truth.” [5]  The President said, “We should be able to agree now that it makes no sense for China to have better rail systems than us”.  On another occasion, Obama stated, “They’re [China] playing for first place, and we need to play for first place.” [6]

But the imagined America example above frames up how China is not like the United States.  Few Chinese can afford a car, China has few expressways and little air travel.  Many Chinese already use conventional passenger rail systems and are habituated to taking a (slow) train between cities.  China is arguably ideal for intercity passenger rail because it is much more populous than the United States and Chinese cities are closely packed along its eastern and southern seaboards and in the Yangtze River valley.   If you live in suburban Tampa and want to visit your parents in suburban Orlando, you can drive your car there in just over an hour, easily find free parking on your parent’s driveway and use your car around town.  If you lived in a Shenzen, a Chinese city of 10 million, and want to visit your parents in nearby Hong Kong, you and your parents are highly unlikely to own a car and most likely live in high-rise apartments lacking parking.  You’d have little choice but a bus or train. 

Amtrak’s Acela rides the most successful of Amtrak’s routes and it is no coincidence the Acela travels through America’s densely populated Northwest Corridor between some of the few American cities where many residents do not own cars.  Wisconsin Governor Scott Walker received much grief for canceling a proposed Milwaukee to Madison high-speed rail line due to cost concerns.  Yet, metro Madison had 561,505 residents in 2010 and metro Milwaukee had 1.6 million [7], not even remotely close to the mega-cities on China’s lines. 

Should we mimic everything China does?  China imprisons those who criticise its government!  China has a fast-growing economy and many positive attributes but the idea that China’s rail system poses a ‘threat’ the United States will “fall behind” is quite a stretch.  Western Europe is also much more densely populated than the United States, meaning the European experience with high-speed trains is not instructive for America.

China’s new rail system is hardly a total success.  It suffered cost overruns, corruption in awarding of contracts [8] [9], priced out customers with higher than expected ticket prices [10], and safety lapses such as last Saturday’s train collision that killed 39 and injured 210 people [11] [12].

Even a high-speed Amtrak proponent, Robert D. Yaro, conceded, “At an estimated $500 billion, a national high-speed rail system won’t come cheap.” [13]  At a time when the nation is suffering a debt crisis with annual budget deficits north of $1 Trillion, can we afford another half trillion for Amtrak?

In a capitalist society like the United States where a number of profitable, well-run freight railroads already run networks between all the major cities, we have to ask why Union Pacific or BNSF aren’t clamoring to do their own high-speed passenger rail trains on the tracks they already own?  If you believe large corporations will always try to make a profit, why wouldn’t CSX and Norfolk Southern be planning their own passenger rail lines if they thought the usage would justify the investment?

China administrative.svg

[1] City data includes 2,812 people/sq. mile in metro NY, 3,023/sq. mile in Beijing municipality and 9,403/sq. mile in Shanghai Municipality.  Note regions like Tibet, Xinjiang and Inner Mongolia in western and northern China are sparsely populated, largely desert, arid and mountainous (e.g. Tibet 3 million people, Xinjiang 22 mil., Inner Mongolia 25 mil.)  http://en.wikipedia.org/wiki/China.  This link is also the source of the public domain map of China.  Shanghai Municipality population is 23.1 million http://en.wikipedia.org/wiki/Shanghai.  Beijing Municipality 19.6 million http://en.wikipedia.org/wiki/Beijing.  New York 18.9 million http://en.wikipedia.org/wiki/New_york . Chicago, 9.5 million http://en.wikipedia.org/wiki/Chicago

[2] The small number of cars produced in China:  http://en.wikipedia.org/wiki/Chinese_car

[3] “Overall, there were an estimated 254.4 million registered passenger vehicles in the United States according to a 2007 DOT study.” http://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States

[4] http://en.wikipedia.org/wiki/Chongquing and http://en.wikipedia.org/wiki/Miami.

[5] http://abclocal.go.com/wtvd/story?section=news/local&id=7826410 

[6] http://www.businessweek.com/magazine/content/10_48/b4205042094905.htm

[7] http://en.wikipedia.org/wiki/Milwaukee,_Wisconsin and http://en.wikipedia.org/wiki/Madison,_Wisconsin.  These two small metros are sprawling and lack a subway to bring riders to rail hubs.

[8] “Millions of dollars in funds for China’s high-speed rail link between Beijing and Shanghai were embezzled in 2010, the state audit agency has said.  Officials said 187m yuan ($28.5m; £17.5m) had been stolen by individuals and construction companies. The judicial authorities are investigating.” http://www.bbc.co.uk/news/world-asia-pacific-12828057

 [9] “Those concerns come as Beijing is investigating corruption accusations against high-ranking railway officials and allegations that some unqualified companies may have been awarded contracts for part of the $400 billion project.” http://articles.economictimes.indiatimes.com/2011-07-27/news/29820696_1_high-speed-rail-train-collision-railway-officials

[10] http://www.infrastructurist.com/2011/01/19/is-chinas-high-speed-rail-pricing-out-passengers/

[11] http://www.telegraph.co.uk/news/worldnews/asia/china/8658959/Anger-in-China-as-bodies-fall-from-carriages-during-train-crash-clean-up.html

[12] http://www.nytimes.com/2011/07/27/world/asia/27china.html

[13] http://www.nytimes.com/roomfordebate/2010/10/13/will-we-ever-have-high-speed-trains/an-investment-we-have-to-make